AFTER LAST year’s US congressional election the new leader of the House of Representatives John Boehner reminded his victorious fellow Republicans (one third of them from the Tea Party tendency) that they now controlled one half of one third of the US governing system. Democrats still run the Senate and the White House. His remark resonates six days ahead of a possible default of the $14.3 trillion public debt. It arises from the failure to agree on a compromise among all three wings of government between spending cuts and tax rises and has been driven by Tea Party opposition to any rise in the federal debt ceiling.
Default would be a dramatic event with global economic consequences. It would highlight how hyper-polarisation between the main parties has made the US system of checks and balances dysfunctional by making the political compromises which usually lubricate it unachievable. There is precious little time to avoid a default after efforts to strike an ambitious 10 year grand bargain engineered by Mr Boehner and President Barack Obama broke down late last week, followed by the failure of an alternative congressional compromise over the weekend. This pits the Tea Party intransigents plus their more numerous Republican colleagues (who fear being called traitors if they agree to any tax increases) against Mr Obama and his Democratic colleagues who refuse to accept a two-stage arrangement prolonging the default crisis for the next six months.
International concern is rising on the markets and in observations by the International Monetary Fund on the stand-off. Its current review of the US economy calls for the debt ceiling to be raised, reforms to healthcare entitlements and revenues increased – echoing Mr Obama’s approach. The strategic role of US treasury bonds in world financial markets will multiply the effects of any default – not least through their potential downgrading by the US-based credit rating agencies. That, ironically, would combine a US financial crisis with the continuing euro zone one which has preoccupied Europeans.
Both are bound up with deeper problems of growth, employment and inequality in these most developed and dominant parts of the world. Mr Obama’s administration had much more success in resolving the 2008 to 2010 financial crisis than in overseeing a recovery of the US economy. Growth is elusive, joblessness hovers around 10 per cent and greatly increased inequality robs the economy of the broad-based consumer demand that drove its previous prosperity. It is calculated that whereas the wealthiest 1 per cent of Americans took in 9 per cent of national income in 1978 the figure had increased to 23.5 per cent by 2007. Since then middle-class incomes have fallen or stagnated.
Such figures mock the Republicans’ hostility to any tax increases on the richest individuals and corporations, just as the growing costs of healthcare for the poor and older people challenge Mr Obama’s budgetary credibility. But he has been more willing to seek agreement than they. Default would trigger a massive blame game.